April 2013

04/30/2013

In hindsight, as mind-numbing and
rage-provoking as the last five years have been for me moonlighting as the sole
executor of his estate, there are some invaluable lessons that I’ve picked up
during the process—ones that have had an impact on my approach to finances and
life.

In many respects, understanding
“personal finance” is easy when it is about annual year-ends and accounts
balances. On the other hand, it is quite another matter when you look at
personal finance over the life of an individual, and yet another still when you
become the executor to that individual’s estate.

Since we will not live long
enough to make all of life’s mistakes, it is prudent to learn from the mistakes
of others. In this spirit, there is much wisdom to be gleaned from a recent
autobiographical article in Forbes
titled “What My
Dad's Death Taught Me About Money.”

As you read this article, there
are many lessons the daughter and only child of the decedent learns in her role
as executor. The unfortunate fact is that these lessons were learned the hard
way and unnecessarily. I highly recommend reading the full article, but her are
the essential takeaways:

Lesson #1: Everyone Should Have
an Estate Plan … or at Least a Will

Lesson #2: Adequate Medical
Insurance is a Must

Lesson #3: Mental Breaks Trump
Burgeoning Bank Accounts

It is less painful and less
expensive to learn from the mistakes of others, especially when it comes to
estate planning. One of the best and last gifts you can leave your loved ones
is a well-planned and organized estate.

As more entrepreneurs, like Ms. Cabot,
approach retirement—about 30% of the nation's business owners are 55 or older,
according to the U.S. Small Business Administration—many are choosing to sell
their companies to their employees, rather than outside buyers.

In the alphabet soup of company
forms (S-Corp, C-Corp, LLC, LLP, LP, LTD., and so on and so forth) there is a
growing turn toward a slightly more obscure acronym: the ESOP.

So, what is an ESOP, what can it
do, and is it right for your business?

ESOPs, or Employee Stock
Ownership Plans, are a tricky breed. Essentially, an ESOP is a tool recently
highlighted by Congress and featured by The
Wall Street Journal in an article titled “Founders Cash Out, but Do Workers Gain?”
Planning to exit a business is all about doing one of two things; either
restructuring the business or selling it outright. With an ESOP you accomplish
both goals and build the company around the very employees that compose the
company in the first place.

Rather than going out and
hunting for a buyer, the employees become vested in the stock ownership of
their own company. In turn, the ownership stake simultaneously becomes a
retirement asset while the ownership of the founder is bought out.

Now, if you are already familiar
with this approach, it may be worth reading the original article since there
are certain limitations affecting the employees-turned-owners. The article
gives examples of how an ESOP can work a win-win for all concerned under the
right circumstances. These examples include Bob’s Red Mill, for example, or,
from a different industry, Manson Construction Co.

ESOPS have been a powerful tool
in an otherwise soft market for business transfers. Accordingly, ESOPS are
worth a good look, and then even a second look, as a unique and proven business
succession strategy.

Families saving for college poured billions
of dollars into U.S. 529 education savings plans over the past five years, even
as these plans' performance lagged behind other investments like mutual funds,
investment research company Morningstar Inc said.

Planning for the next
generation, and for what you will leave them, often varies depending on what
you have and what your loved ones will need. In today’s economy, the rising
costs of education are leading many families to choose the “gift of education” as
a fundamental goal in their wealth transfer planning.

As a result, it is no surprise
that recent analysis by Morningstar Inc.
found a sharp increase in contributions to Section 529 plans in 2012. Reuters reported on these findings in an
article titled “Morningstar: 529 college savings plans up in
2012 despite some lags.” The article notes a 529 plan is a
tax-advantaged account that encourages savings now toward exorbitant college costs later. That said, not all plans are alike and the study found some
were far better than others, and some were even of questionable worth.

The final analysis: although 529
education savings plans as a whole underperformed against some mutual funds,
2012 saw a 25% rise in 529 plan assets against a 13.4% gain in the S&P
index.

Credit shelter trusts are a way to take full
advantage of state and federal estate tax exemptions. Although such trusts may
appear needless unless you are a multi-millionaire, there are still reasons for
those of more modest means to do this kind of planning, and one of the main
ones is state taxes.

There are some estate planning
tools that are just basic and vital, regardless of tax law changes.
Unfortunately, some of these tools may be ignored by taxpayers (to their peril)
when they appear to be eclipsed by changes in the tax laws. For the prudent
taxpayers, however, old standbys like the credit
shelter trust should not be swept aside.

Before the advent of portability as a method to maximize the
full estate tax exemption available to married couples, such couples would
oftentimes get caught in a marital
deduction trap. In other words, the first spouse to die could pass all
their wealth to the surviving spouse without triggering estate taxes, but upon
the death of the surviving spouse only one spousal exemption (i.e., that of the
surviving spouse) would be available to reduce estate taxes on the couples
combined estate. Under the right circumstances, this was a recipe for disaster.

Enter the credit shelter trust, also known as a bypass trust, which was a way
of avoiding that marital deduction trap. Nevertheless, recent changes to the
federal estate tax laws now allow a decedent spouse to pass their assets and
their estate tax exemption to their surviving spouse. This portability of the estate tax exemption can now give a married
couple the power to shelter as much as $10.5 million tax-free.

So, no need for those credit
shelter trusts? Not so fast! As addressed in a recent post in Elder Law Answers titled simply “Credit Shelter Trusts,” there is
still plenty of life left in the this tried-and-true estate tax planning
approach.

For starters, many states still
have their own independent estate taxes at much lower levels than the $5.25
million level exempted per spouse under the federal estate tax exemption. More
importantly, portability does not
apply to such taxes. In addition, credit shelter trusts not only shelter assets
from estate taxes, but they can protect an inheritance from the unsuccessful
remarriage of the surviving spouse and general inheritance protection.

While there are myriad trust
arrangements available to help you achieve your specific estate planning goals,
the basic credit shelter trust is a proven tool that should be considered in
the estate planning of every married couple.

04/29/2013

Telling heirs how much they stand to inherit
can be a subject fraught with emotional land mines for parents … But waiting
too long to discuss the issue, or avoiding the conversation altogether, is a
bad idea, financial advisers say. It can cause confusion, mistrust and leave
heirs unprepared to manage the family's wealth.

There are a number of “talks”
you have with your kids. We all are familiar with the infamous “the talk” – and a few others that are
more easily avoided than had.

Add “the inheritance talk” to the short list of intergenerational talks
too important to avoid. So, how do you prepare and execute this
too-important-to-avoid chat?

To be blunt: there is no easy
answer. Why? Because so much of the talk depends on what you have to leave, who
is going to manage it, who is going to inherit it, and how soon are they going
to get it?

One of the key reasons for this
essential intergenerational communication is to prepare the inheriting
generation for the attending responsibilities. One challenge, of course, is
that any “inheritance” carries the risk of robbing a developing person of their
work ethic.

In short, what makes you, your
assets, and your heirs unique? That is what needs to be understood and
communicated. The sooner you have the inheritance talk, the better it will be
for all concerned.

04/28/2013

Federal
estate taxes aren't an issue for most Americans. But you may need to worry
about death taxes in your state.

Budgets are set to battle once
more on Capitol Hill in the near future. All considered, estate planners are
fairly content with the last battle and the federal estate tax laws that went
into effect with the American Taxpayer Relief Act (ATRA) at the beginning of
the year. Consequently, most taxpayers have been spared the federal estate tax.
But don’t forget about what your state has in store for you.

As a recent Kiplinger article warns, the state level transfer taxes have not
fallen away like the federal transfer tax. The article, titled “Beware States With Their Own Estate Taxes,”
notes that fully 21 states (plus the District of Columbia) currently impose
some kind of transfer tax, whether a death tax, an inheritance tax, or both
simultaneously. Furthermore, if you pay too much attention to the federal tax,
then you might think you are home free in terms of exempt amounts.
Unfortunately, state taxes are, generally, set with much lower exemption
amounts.

The Federal tax has been
permanently set at a rather generous range with a $5.25 million exemption
amount. On the other hand, New York
starts taking a piece of the estate pie at $1 million.

If you live in a death tax
state, now is the time to be planning to avoid or minimize the impact. For that
matter, too, where do you plan your retirement? Crossing into a new state for
retirement or late-in-life care is not just about passing the “Welcome” sign on
the highway. Accordingly, remember to consider how your move will affect your
assets and overall estate plan.

Then again, how much do you
trust Congress and their idea of a “permanent” estate tax law?

Already these new budget battles
have given platform to new calls for a change in the “permanent” federal estate
tax exemption. In fact, the Obama Budget Proposal would reduce the
just-agreed-upon “permanent” exemption from $5.25 million to $3.5 million (The Washington Timeshere).

“We hope that this new feature [the Inactive
Account Manager] will enable you to plan your digital afterlife–in a way that
protects your privacy and security — and make life easier for your loved ones
after you’re gone,” wrote Google product manager Andreas Tuerk in a blog post.

We live our lives today on the
internet and in the cloud in ever more pervasive ways. This should not come as
a surprise. After all, most of us walk around with the internet in our pocket
24/7 (and soon we may wear it as headgear, for those watching Google glasses
with interest). What happens to our virtual life when our physical life is
over?

What happens to everything on
the cloud when you die?

From your personal information
to Facebook accounts to iTunes collections, so much of it exists online. Until
recently, there have been few solutions to the meticulous record keeping to
keep everything straight, let alone remembered.

The important take-a-way is the
importance of the planning. What about your other accounts and bits of data
snaking across the web? What plans have you made to document your virtual life
into the afterlife?

“It’s too early to do exit planning; I need
to retain control of my business!” It’s
always a feel-good moment for me to let a business owner know that these two
concepts are not mutually exclusive. There are myriad ways to begin the exit
process from your business without giving up management control.

Exit planning for your small
business isn’t like a light switch – there is no simple on/off switch when it
comes to control or ownership. It took time to build the business the right way
and so it will also take proper time and planning to leave it on your own
terms. Fortunately, you can structure your exit in such a way that you can lay
the foundations to flip the switch in the future while retaining management
control today.

So, how do you structure the
business so that you can start succession while still sitting on the throne? A
recent Forbes article titled “How To Retain Control, Even As You Exit”
provides some practical advice.

At the most basic level, you may
want to adjust the structure of the business itself. Is it an LLC? If yes, then
retain control by making it a “manager-managed” LLC and retain the management
position. Is it a corporation? If yes, then there are more options. For
instance, you could issue various types of stock, either in different classes
(voting vs. non-voting), or even offer restricted stock that becomes vested
only upon certain conditions. The corporate structure also offers other
powerful tools like Employee Stock Ownership Purchase (ESOP) arrangements.

Your approach and the timing of
your exit will depend on other factors, not the least of which hinges on your
successors. When will they be ready to assume more control? Even more
important, when will you be ready to begin relinquishing control?

More often than not, you can
structure an exit so both control and financial gain slowly adjust to
everyone’s benefit, but you have to start with a plan.

"I can't tell you how many times I've
seen people not get what they want because the patient did not adequately share
their wishes," says Fern Baudo, a nurse who is president of Fern Baudo
Adult Health Nurse Practitioner PC, which helps clients with their advance care
planning.

Planning for your end-of-life
decisions, let alone coming to terms with the important questions your family
will face, can be a difficult process. Fortunately, you can ease the process
for all concerned through proper basic legal planning.

So, have you executed your
medical directive or living will? Was it one you created yourself or downloaded
from the internet? If yes, you might want to reconsider that move while you
can.

Bloomberg recently published an article titled “The Right Way to Craft a Living Will”
that discouraged taking the self-help approach to this fundamental component of
your estate planning. It is important to know there is a “right way to craft a living will” and it does involve more than simply signing on the dotted line of a
pre-printed form.

Essentially, there may come a
time when you are not “available” to make a medical decision – from
resuscitation to feeding tubes to what-have-you. What happens then will depend,
in large part, on how clear your instructions are. There are some definite
shortcomings that can arise, particularly with those free forms you pick up
online.

A medical directive or living
will is designed to speak for you and be some
kind of arbiter. Of course, you can only have so much forethought and the
language used in any document can only be so clear. For example, the original
article illustrates the complex issues surrounding the word “terminal.”

Given the difficultly attending
the whole notion of predicting the course of your future health, consider
appointing a trusted family member or friend to be your health care agent to
make the decisions when you cannot. That way you are not merely trusting a
piece of paper and the interpretation of the same.

Whatever legal arrangements
prove to be the most powerful or expedient, the basic truth is that any plan
can be put to paper. However, to be truly effective the contents of the plan on
that paper and your specific wishes need to be communicated to the people who
will be part of the process.

Make sure your loved ones know
what your wishes are and that they will work to ensure that they are honored.

LIVING and working abroad may sound
romantic. But having a financial life in more than one country — if one of
those countries is the United
States — is becoming increasingly
complicated.

Living across national
boundaries is an exciting life for an increasingly large portion of the
population, not to mention a daily reality for immigrants heading one way or the
other. That said, if you are skipping back and forth across a U.S. border, beware of the
attending financial hurdles and the ever heightened attention of the IRS.

If you are no stranger to
frequent border traffic, then likely you are aware of the recent adjustments in
IRS practice, not to mention several large developments involving overseas
accounts and income. Essentially, the IRS is on a mission – it wants to capture
more and more overseas accounts and assets taxable under U.S. law. How? By working in sync
with international banking institutions.

Ostensibly, the targets are
tax-evasion type accounts in Swiss banks. In reality, the dragnet is catching a
broader group of individuals and families of all means and intentions. And many
of these individuals and families are unaware that they are targets and even
fewer are aware the rules of the (tax) road.

Bottom line: if you’re going to
be crossing borders regularly, whether for work, for family, or even as part of
your retirement, then this is an important reminder about the hurdles those
little lines on the map can pose if you aren’t careful. Whether you work, live,
or retire abroad, it’s important to be aware of the new international
complications.